How to Transform Good Questions into Great Ones

How do you improve a fair or even a good question—possibly turning it into a great one?

It takes hard work to come up with really strong questions. In this newsletter I’d like to give you a set of criteria and a process that will make it a lot easier for you.

Here’s how it can work for you.

First, imagine this scenario: You’re meeting with a senior executive, Deborah, who has just been hired from the outside to take over as the SVP in charge of a major function. You’ve asked for a meeting with her to introduce yourself, establish a relationship, and create the basis for some possible future work together (her position is almost irrelevant—it could be CFO, CMO, CEO, CHRO, CIO, General Counsel, etc.).

So what do you ask her in your meeting?

Below, I’ve set out a list of the key characteristics of a power question. Not every power question has to have all of these, but they should all have some of them.

For each criterion, I’ve provided ideas to help you sharpen your questions, with this scenario in mind: You’re going to meet with a new top executive who was hired from the outside.

Here goes. Keep in mind that my alternative questions are just illustrative—you’ll have to adapt them/the approach to your particular clients and their issues.

Criterion One: Power Questions are open-ended. For example:

Instead of: “Have you enjoyed your first few weeks with the company?” (To which the client can simply answer “Yes” or “No”!) or “How long have you been on board?”

Try asking: “What have you learned in these first few weeks since you started?” or even simply, “What attracted you to the company?”

Your strategy: Always work to create an open-ended version of a closed-ended question. Minimize informational questions when meeting with a senior client executive.

Criterion Two: Power Questions are fresh and interesting—even surprising. For example:

Ask: “What process are you using to set your short- and long-term priorities?”

Your strategy: Don’t simply use the first question that comes to mind. Think about a question no one else is asking, or rephrase a common question in a new, fresh way.

Criterion Three: Power Questions help you get “under the skin” of your client and draw out their most important issues and concerns. For example:

Instead of: “What are your top priorities for the next six months?” (It’s an overused question, and in any event some senior clients won’t reveal this to you unless they already know you pretty well)

Ask: “I’m curious, how is your new push into emerging markets going to impact your investment priorities in the coming year?” (That is, draw their issues out by asking a series of implication questions). Or, “What are the key performance objectives that your leadership has established for you and your role this year?”

Your strategy: Consider multiple approaches to drawing out the other person’s real agenda. You can do this by asking implication questions (e.g., “How are you reacting to…”), and also by asking a more specific question (e.g., “In which areas would you give yourself an ‘A’ grade today, and where do you wish you were making faster progress?”). Another one I like is, “Among all your various priorities, which ones are you personally most engaged in?”

Criterion Four: Power Questions show thoughtful preparation on your part. For example:

Instead of: “Can you tell us about your strategy?” (Yes, a CEO once told me this was the exact question two partners from a major consulting firm opened up with after having cold-called him…)

Ask: “I noticed in your 10K that you’ve taken a somewhat unorthodox approach to the long-term compensation of your top officers. Can you share your thinking behind it?” Or, “I’m familiar with the broad outlines of your CEO’s new, four-point strategy that was announced on the recent analyst call. How will this impact your own programs going forward?”

Your strategy: Prepare, but prepare selectively. You don’t need to create a 30-page briefing deck that reviews every aspect of your client’s operations. Instead, scan the background information and pick two or three areas you may want to probe. Remember, all you need are one or two really good questions to fuel a high-impact conversation. If you have to spend hours preparing for every single meeting, you’ll never make the connections you need to build a strong, diverse client base.

Criterion Five: Power Questions make the other person think and reflect deeply about their issue and the solutions they are considering. For example:

Instead of: “This sounds like a very interesting program…when would you like to launch it?” (Don’t accept the client’s problem or solution definition without some additional probing!)

Ask: “I’m curious, why did you decide to launch this particular program, now?” or “What business goals is this program going to help support?”

Your strategy: Ask questions that help you understand higher-level goals and strategies. Often, this is a “Why?” question. Keep in mind Sakichi Toyoda’s exhortation to his engineers at Toyota to ask “Why?” five times about any quality or manufacturing problem! Remember, a particular program or initiative is just one way of accomplishing a higher-level goal—there might be other, better ways.

Criterion Six: Power Questions tap into emotions and personal implications as well as ration/analytical dimensions of the issue. For example:

Instead of: “What do you think about this approach?”

Ask: “How do you feel about this approach?”

Instead of: “Who are the key stakeholders for this program?”

Ask: “How will this program impact your own roles and responsibilities?”

Ask: “When some other clients of mine have taken a new role like yours, they’ve often spent their first few months in three areas: building their internal network, developing their strategic priorities, and assessing their team. I’m curious, what have you been focused on?”

Your strategy: Ask “Credibility-Building” questions that implicitly build your credibility by stating an observation and then asking a question.

In summary: When you prepare your questions for an upcoming meeting, use this process:

Review your question against each of these criteria. Does it meet two or three of them? What changes in would make it better align with the qualities of Power Questions?

Think about ways to sharpen each question using the strategies I’ve outlined.

Multi-Factor or Not Multi-Factor? That Is the Question

Let’s pretend you are a US investor that wants to deploy some of your money overseas. You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment. Your investment decision is logical to you. But you have choices: You could a) simply invest in a traditional index like the MSCI EAFE, b) invest in a fund that systematically emphasizes a single factor (like a value fund) that only buys specific stocks related to that factor, or c) invest in a developed fund that blends several factors together, like the JPMorgan Diversified Return International Equity ETF (JPIN). What is the best choice?

Investing in a traditional international market capitalization index like the MSCI EAFE is not a bad choice. It has delivered nice returns for a US investor, especially uncorrelated outperformance in the 1970s and 1980s, and helped to diversify a US-only portfolio.

Your second choice is to invest in one particular factor because it makes sense to you. Sticking with the example of a value strategy, you might believe a fund or index that chooses the cheapest or most attractively valued stocks based on metrics like Price to Earnings (PE) is best.

You could go find a discretionary portfolio manager who only buys stocks he deems to be cheap. Typically the concept of “cheap” is based on some absolute metric that the manager has in mind, such as never buying a stock with a PE greater than 15. If there are not enough stocks that are attractive, he will hold his money in cash until he finds the prudent bargains he seeks. This prudence also obviously risks possible underperformance from being absent from the market.

The alternative is to buy a value index or fund that systematically only buys the cheapest stocks in a particular investment universe. So if there are 1000 investable stocks available, the index ONLY buys the cheapest decile of 100 stocks and is always fully invested in the 100 securities that are relatively cheapest. This is an investment approach that a discretionary manger may disdain. The discretionary value manager may look at those same 100 stocks and think they are pricey. But nevertheless, academic research has shown that always being fully invested in the relatively cheapest percentiles of stocks in the US has produced superior returns over many decades.

Such a portfolio is called a “factor” portfolio. Why the name? In the early 1960s, academics introduced the concept of beta and demonstrated that individual US stocks had sensitivities to, and were driven by, movements in the broad market. In the early 1990s, academic research began to show that other “factors” such as value and size also drove US stock returns. Since then, several factors have been identified as driving individual stock outperformance: value, size, volatility, momentum and quality. Stocks that are cheaper, smaller, less volatile, have more positive annual returns and higher profitability have historically outperformed their peers. It turns out these factors also work internationally.

Of all the factors, value is the factor that has been the best known the longest (even before it was academically identified as a “factor”), thanks to the books of Warren Buffet’s teacher Ben Graham. And if you look abroad at an array of developed global markets and create a value index and compare it to its simple market capitalization weighted brother, the historic outperformance of value has been stunning. Until recently.

While there was some variability by country, on average from the mid-1970s up until 2005 a value factor portfolio in a developed market outperformed its market cap weighted index by about 2% a year. That’s a lot. By contrast, since 2005, the average developed country value portfolio has underperformed a market cap indexes by about -40 basis points. Which is the danger of investing in one factor. It may not always work at every point in time.

So if investing in one factor like value runs the risk of underperforming, how about a multi-factor international developed equity portfolio?

Below is a breakdown of individual factor portfolios’ performance in international developed equity markets since 2005, an equal weighted factor portfolio as well the performance of the MSCI EAFE as our performance reference. Note that, for the last 13 years, value has been the poorest factor by far, while the others have handily beaten the EAFE. An equal weighted portfolio of all 5 factors, while not as optimal as some of the individual factor results, beats the EAFE by 1.6% and has an information ratio, or risk adjusted returns that are superior by 37%. The equal weighted factor portfolio also has the advantage of not having to predict which factor will work when, so even when a factor like value does not beat the market, the other factors can pick up the slack.

SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.

The equal weighted factor portfolio has one other advantage over the market cap weighted alternative. Note in the chart below how well the portfolio outperformed in the 2008 crisis, so it tends to do relatively well in highly volatile sell offs.

SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.

While it’s not inconceivable that one or two of these factors could erode, or underperform for a stretch, the fact that you have exposure to multiple factors in a portfolio that seems to do especially well in crises suggest the multi-factor blended portfolio remains the most attractive way to invest in developed markets.

So, when asked the question: Multi-factor or not multi-factor? The data speaks for itself.

DEFINITIONS: Price to earnings (P/E) ratio: The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

DISCLOSURES: MSCI EAFE Investable Market Index (IMI): The MSCI EAFE Investable Market Index (IMI), is an equity index which captures large, mid and small cap representation across Developed Markets countries* around the world, excluding the US and Canada. The index is based on the MSCI Global Investable Market Indexes (GIMI) Methodology—a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. This methodology aims to provide exhaustive coverage of the relevant investment opportunity set with a strong emphasis on index liquidity, investability and replicability. The index is reviewed quarterly—in February, May, August and November—with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large, mid and small capitalization cutoff points are recalculated.

Investors should carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read the prospectus carefully before investing. Call 1-844-4JPM-ETF or visit ww.jpmorganetfs.com to obtain a prospectus.